United States District Court, N.D. California
IN RE: UBIQUITI NETWORKS, INC. SECURITIES LITIGATION
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For Steven N. Bell, Individually and on Behalf of All Others Similarly Situated, Plaintiff: Christopher Paul Seefer, Shawn A. Williams, LEAD ATTORNEYS, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Catherine J. Kowalewski, Danielle Suzanne Myers, Darren Jay Robbins, David Conrad Walton, Robbins Geller Rudman & Dowd LLP, San Diego, CA.
For Bristol County Retirement System, Lead Plaintiff, Plaintiff: Ashley Price, Danielle Suzanne Myers, LEAD ATTORNEYS, Robbins Geller Rudman and Dowd LLP, San Diego, CA; Christopher Paul Seefer, LEAD ATTORNEY, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Iona M Evans, LEAD ATTORNEY, PRO HAC VICE, Jonathan Gardner, Michael Walter Stocker, LEAD ATTORNEYS, Carol C. Villegas, PRO HAC VICE, Labaton Sucharow LLP, New York, NY; Christopher T. Heffelfinger, Berman DeValerio, Palm Beach Gardens, FL.
For Brian Goecker, individually and on Behalf of All Others Similarly Situated, Plaintiff: Lionel Z. Glancy, Michael M. Goldberg, LEAD ATTORNEYS, Robert Vincent Prongay, Glancy Binkow & Goldberg LLP, Los Angeles, CA; Jeremy A Lieberman, PRO HAC VICE, Pomerantz LLP, New York, NY.
For Ubiquiti Networks, Inc., Robert J. Pera, Peter Y. Chung, Christopher J. Crespi, Charles J. Fitzgerald, John L. Ocampo, Robert M. Van Buskirk, John Ritchie, Defendants: Matthew Douglas Harrison, LEAD ATTORNEY, Gavin Masuda, Peter Allen Wald, Latham & Watkins LLP, San Francisco, CA; Timothy Paul Crudo, Coblentz Patch Duffy & Bass LLP, San Francisco, CA.
For UBS Securities, LLC, Deutsche Bank Securities Inc., Raymond James & Associates, Inc., Pacific Crest Securities LLC, Defendants: Ethan D. Dettmer, Gibson, Dunn & Crutcher LLP, San Francisco, CA.
For Inter-Local Pension Fund GCC/IBT, Movant: Christopher Paul Seefer, LEAD ATTORNEY, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Ashley Price, Danielle Suzanne Myers, Robbins Geller Rudman and Dowd LLP, San Diego, CA; Jonathan Gardner, Labaton Sucharow LLP, New York, NY.
ORDER GRANTING MOTIONS TO DISMISS
YVONNE GONZALEZ ROGERS, UNITED STATES DISTRICT COURT JUDGE.
Defendant Ubiquiti Networks, Inc. (" Ubiquiti" ) is a publicly traded company that makes broadband wireless devices and sells them worldwide, primarily in emerging markets such as South America. Plaintiffs are alleged purchasers of Ubiquiti stock who seek to represent a class of similarly situated individuals. The gravamen of their allegations is that Ubiquiti knew of a wide-ranging counterfeit operation producing knock-offs of Ubiquiti devices and thereby damaging Ubiquiti's standing in the market, but that Ubiquiti, in statements made in connection with its October 14, 2011 initial public offering of stock (" IPO" ), as well as later statements connected to its announcement of quarterly financial results, downplayed the extent of the counterfeiting and concealed its impact on Ubiquiti's business. Plaintiffs allege that, once the market learned of the counterfeiting's true extent and impact, Ubiquiti's stock price fell, damaging them and the putative class.
All defendants move for dismissal of plaintiffs' Consolidated Amended Complaint (Dkt. No. 54 (" CAC" )). The CAC groups the defendants in various sets and subsets, as set forth below:
o the " Ubiquiti Defendants," comprised of (i) Ubiquiti itself, (ii) Ubiquiti's chief executive officer (" CEO" ) Robert Pera and chief financial officer (" CFO" ) John Ritchie (jointly, the " Officer Defendants" ), and (iii) Peter Y. Chung, Christopher J. Crespi, Charles J. Fitzgerald, John L. Ocampo, and Robert M. Van Buskirk, who allegedly were Ubiquiti directors at the time of the IPO (collectively, the " Director Defendants" ); and
o the " Underwriter Defendants," four investment banking firms that allegedly underwrote Ubiquiti's IPO: UBS
Securities LLC, Deutsche Bank Securities Inc., Raymond James & Associates, Inc., and Pacific Crest Securities LLC.
The CAC asserts five counts of securities violations, as against the defendants indicated:
Count 1: Section 11 of the Securities Act of 1933 (" Securities Act" ), 15 U.S.C. § 77k, as against all defendants;
Count 2: Section 12(a)(2) of the Securities Act, 15 U.S.C. § 77 l (a)(2), as against Ubiquiti, the Officer Defendants, and the Underwriter Defendants;
Count 3: Section 15 of the Securities Act, 15 U.S.C. § 77o, as against all Ubiquiti Defendants;
Count 4: Section 10(b) of the Securities Exchange Act of 1934 (" Exchange Act" ), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, as against Ubiquiti and the Officer Defendants; and
Count 5: Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as against Ubiquiti and the Officer Defendants.
The Ubiquiti Defendants seek dismissal with prejudice of the entire CAC. (Dkt. No. 57 (" Ubiquiti MTD" ).) The Underwriter Defendants seek dismissal with prejudice of the two claims asserted against them, that is, plaintiffs' Section 11 and Section 12(a)(2) claims. (Dkt. No. 56 (" Underwriter MTD" ).) Both motions are joined by all defendants, and are fully briefed. (Dkt. Nos. 65 (" Opp'n" ), 67 (" Ubiquiti Reply" ), 69 (" Underwriter Reply" ).)
Having carefully considered the papers submitted and the pleadings in this action, and having had the benefit of oral argument, for the reasons set forth below the Court hereby Grants both motions to dismiss. Plaintiffs have leave to amend in accordance with counsel's Rule 11 obligations and the guidance provided by this comprehensive opinion. In summary, when analyzed closely, the CAC, while lengthy, pleads neither material omissions or misrepresentations upon which reasonable investors would have relied, nor that the accused statements were made with scienter.
Essential Background Allegations
Located in San Jose, California, Ubiquiti designs, manufactures and sells broadband wireless solutions worldwide. It offers a portfolio of wireless networking products and solutions, including high performance radios, antennas, and management tools designed for wireless networking and other applications in the unlicensed radio frequency spectrum. Ubiquiti's business focuses on developing economies, such as those in South America, the Middle East, and Asia.
Plaintiffs allege that, from 2009 through 2012, unbeknownst to the company's investors but known internally to the Ubiquiti Defendants, Ubiquiti was the target of a widespread international counterfeiting scheme that was growing in size and materially affecting its business. At the center of the scheme were Kozumi USA Corp. (" Kozumi" ), a former distributor of Ubiquiti products, and its owner, Shao Wei " William" Hsu. Hsu allegedly used a factory in Shenzhen, China, called the " Hoky" factory and owned by Kenny Deng, to manufacture counterfeit Ubiquiti products. Hsu then allegedly distributed the products through Kozumi or its subsidiaries to markets also served by Ubiquiti.
Ubiquiti completed its IPO on October 14, 2011. Plaintiffs allege that, in statements leading up to and after the IPO, Ubiquiti knowingly or recklessly misrepresented the risk that counterfeiting presented to its business. Specifically, plaintiffs identify six different allegedly
misleading statements: (1) a registration statement filed with the Securities Exchange Commission (" SEC" ) in connection with Ubiquiti's IPO, which, plaintiffs allege, misrepresented the state of Ubiquiti's counterfeiting problem by characterizing it as a mere contingency when in fact it was an existing and growing problem; (2) & (3) earnings reports filed with the SEC which contained substantially the same warnings as the registration statement but were filed somewhat later, namely, in connection with financial statements covering the first quarter of fiscal year 2012 (" 1Q12" ), as well as the second quarter (" 2Q12" ); (4) a statement made in connection with Ubiquiti's 2Q12 announcement by Ubiquiti CEO Pera, in which Pera stated that the performance of Ubiquiti's " big hitters" in 2Q12 was consistent with that of the previous quarter; (5) a press release Ubiquiti issued in connection with its financial results for the third quarter of fiscal year 2012 (" 3Q12" ) which quoted Pera saying there was " solid momentum across all elements" of the company's product lines; and, finally, (6) a May 1, 2012 statement made by Ubiquiti's CFO Ritchie representing that Argentina, among other South American countries, " continue[d] to do well" for Ubiquiti.
Seventeen days after this last statement, on May 18, 2012, Ubiquiti filed a trademark action in this Court against Hsu and Kozumi, seeking, among other things, a temporary restraining order halting Hsu and Kozumi's encroachment on Ubiquiti's intellectual property rights. In support of Ubiquiti's application for a temporary restraining order, Ritchie filed a declaration stating, among other things, that sales orders for Argentina had declined by 88 percent between 2Q12 and 3Q12, and that Argentina's book-to-bill ratio (a measure of demand for goods) had also declined severely.
The Court will supply further details as pertinent in the analyses that follow.
Applicable Legal Standard
A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199-1200 (9th Cir. 2003). " Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). All allegations of material fact are taken as true and construed in the light most favorable to the plaintiff. Johnson v. Lucent Techs., Inc., 653 F.3d 1000, 1010 (9th Cir. 2011). To survive a motion to dismiss, " a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
The Court turns first to Counts 1 and 2 of the CAC, which arise under the Securities Act. The Court then skips to Count 4, brought under the Exchange Act. The Court addresses Counts 3 and 5 in tandem at the end of this opinion, because those counts require plaintiffs to plead an underlying
violation of the securities laws and, as set forth herein, the Court finds that plaintiffs have failed to do so.
I. Count 1: Section 11 of the Securities Act
Section 11 " provides a cause of action to any person who buys a security issued under a materially false or misleading registration statement." In re Century Aluminum Co. Sec. Litig., 729 F.3d 1104, 1106 (9th Cir. 2013). To state a claim under Section 11, plaintiffs must adequately plead " (1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment." Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1161 (9th Cir. 2009) (quoting In re Daou Sys., Inc., 411 F.3d 1006, 1027 (9th Cir. 2005)). Section 11 is a strict liability statute that does not require fraudulent intent. Daou, 411 F.3d at 1027. However, claims that lack the element of fraud are still subject to the heightened pleading requirements of Rule 9(b) if they " sound in fraud." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir. 1996).
For purposes of the instant motion, the parties raise two fundamental issues regarding plaintiffs' Section 11 claim: (a) whether plaintiffs' allegations satisfy the Section 11 standing requirement that their shares be " traceable" back to the IPO; (b) assuming standing, whether the heightened pleading standing of Rule 9(b) applies to plaintiffs' Section 11 claim; and (c) whether plaintiffs have pled a prima facie Section 11 claim under the applicable pleading standard. As set forth below, the Court answers the first two questions in the affirmative and the last in the negative. Accordingly, the Court GRANTS the motion to dismiss plaintiffs' Section 11 claim.
A. Whether Plaintiffs' Shares Are " Traceable" to Establish Standing
To have standing to bring a Section 11 claim, plaintiffs must be able to trace their shares back to an allegedly misleading registration statement. Century Aluminum, 729 F.3d at 1106 (citing Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1080 (9th Cir. 1999); Lee v. Ernst & Young, LLP, 294 F.3d 969, 978 (8th Cir. 2002)). Century Aluminum outlined two types of situation in which the tracing issue arises, and explained what both require of a plaintiff seeking to allege standing. In the first situation, " all of a company's shares have been issued in a single offering under the same registration statement." Id. In such circumstances, the tracing requirement " generally poses no obstacle." Id. Simply pleading that the plaintiff's shares " are directly traceable to the offering in question states a claim 'that is plausible on its face.'" Id. at 1107 (quoting Twombly, 550 U.S. at 570). " No further factual enhancement is needed because by definition all of the company's shares will be directly traceable to the offering in question." Id. (emphasis in original) (citing DeMaria v. Andersen, 318 F.3d 170, 176 (2d Cir. 2003)).
The second situation occurs when " a company has issued shares in multiple offerings under more than one registration statement." Id. In such scenarios, " the plaintiff must prove that her shares were issued under the allegedly false or misleading registration statement, rather than some other registration statement." Id. at 1106. " Courts have long noted that tracing shares in this fashion is 'often impossible,' because 'most trading is done through
brokers who neither know nor care whether they are getting newly registered or old shares,' and 'many brokerage houses do not identify specific shares with particular accounts but instead treat the account as having an undivided interest in the house's position.'" Id. at 1107 (quoting Barnes v. Osofsky, 373 F.2d 269, 271-72 (2d Cir. 1967)). At the pleading stage, then, a plaintiff must allege facts from which the court can " reasonably infer that their situation is different." Id. at 1108. The court may require " a greater level of factual specificity" in the complaint before it may " reasonably infer that shares purchased in the aftermarket are traceable to a particular offering." Id. at 1107. " Making this determination is 'a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.'" Id. (quoting Iqbal, 556 U.S. at 679).
Here, plaintiffs adequately allege their statutory standing to bring a Section 11 claim. They allege the existence of, and the Court incorporates by reference, the Form S-1 Registration Statement that Ubiquiti filed in connection with its IPO. (CAC ¶ 107; Dkt. No. 58 (" Masuda Decl." ), Ex. 1 (" Registration Statement" ).) Further, they allege that they " acquired Ubiquiti shares pursuant and/or traceable to the Registration Statement for the IPO." (CAC ¶ 197.) The Registration Statement contained a lock-up provision that prevented resale of the shares offered in the IPO for 180 days thereafter. (Reg. Stmt. at ...